On 19 June 2019, the ECJ published decisions in two cases on two aspects of Swedish law that allow a Swedish parent company to claim relief for losses of overseas subsidiaries in certain circumstances.
These decisions are of interest as they serve to limit the principle established in the case of Marks & Spencer5. In Marks & Spencer the ECJ held that:
- A restriction of the freedom of establishment (limiting the right of a company to deduct losses of a foreign subsidiary) is justified by the need to preserve the balanced allocation of the power to impose taxes between member states, and to prevent the risk of losses being used twice.
- However, it is disproportionate for the member state of the parent company to deny the ability for the parent to use the losses of a non-resident subsidiary that are “final”. To rely on this, the parent must be able to show (broadly-speaking) that there is “no possibility” for the non-resident subsidiary to use the losses in its own state.
In the first case6 a Swedish parent company (Memira) argued that the freedom of establishment7 meant that it should be able to use (by way of deduction against profits for Swedish tax purposes) losses incurred by its German subsidiary where the German subsidiary had been absorbed by merger. On the facts, neither Swedish law nor German law allowed the losses to be used by the Swedish parent. The ECJ held that EU law did not assist Memira. The German subsidiary’s losses were not “final” (for EU law purposes) as there existed the possibility that the subsidiary could be sold to a third party, at a price reflecting the availability of the losses. Memira therefore, in an economic sense, had the possibility of an ‘indirect’ deduction of the subsidiary’s losses.
In the second case8 another Swedish parent (Holmen) argued that the freedom of establishment meant that it should be able to use losses incurred by a Spanish subsidiary of its Spanish subsidiary (ie losses of Holmen’s sub-subsidiary). The Swedish rules prevented Holmen from using the losses incurred by a non-resident sub-subsidiary. The ECJ drew a distinction between cases where the subsidiary and sub-subsidiary were resident in the same member state, and cases where they were not. Where they were resident in the same member state, the losses of the sub-subsidiary could be “final” (for EU law purposes). Where they were not resident in the same member state, the ECJ held that to allow the parent to use the losses could lead to group tax rate optimisation strategies and that therefore it would not be disproportionate in those cases to allow the parent member state to deny use of the losses.